Bank Of America: Earnings Validate Our Thesis Of Staying Away From The Stock

The Bank of America (NYSE:BAC) reported its performance for the third quarter of the current year, which lagged behind analyst expectations. The following table shows how revenues of $20.66 billion remained 6% behind, while earnings per share of $0 exceeded a 7 cent expected loss.

Much of the deterioration in the results of the third quarter is blamed on litigation charges and an accounting charge tied to the company's debt. Over $28 billion were set aside by Chief Executive Officer Brain T. Moynihan for the settlement of various litigation cases. In our earlier report on the bank, we advised investors to stay away from the stock, since the company is surrounded by significant litigation, which will hurt profits. We reiterate our stance on the stock. The results for the third quarter were, however, positively affected by mortgage lending, investment banking and trading. Revenues related to mortgage activity surged 12% when compared sequentially.

The bank reported a bottom line of $340 million on revenues of $20.4 billion. Both the top line and bottom line remained 86% and 7% behind the linked quarter. Much of the decline in revenues was blamed on the 16% sequential decline in revenues resulting from non-interest revenues. The bank posted non-interest revenues of $10.5 billion against $12.4 billion in the linked quarter. However, the bank was able to enhance its net interest income by 4% sequentially from $9.78 billion in the second quarter to $10.1 billion at the end of the third quarter.

Total average deposits of $1.04 trillion at the end of the third quarter remained 2% above the deposits that the bank maintained during the second quarter of the current year. Total loans balances of $88.9 billion declined 1% sequentially and 6% YoY.

A closer look at the bank's capital position reveals that it had a Tier 1 capital ratio of 13.64% and a Tier 1 common capital ratio of 11.4% at the end of the third quarter of the current year. This is compared to a Tier 1 capital ratio of 13.9% and a Tier 1 common capital ratio of 12.7% at the end of the third quarter of the current year.

Segmental Review:

All of the segments, except Consumer and Business Banking, posted a drop in their earnings when the bank reported its third quarter performance.

The Consumer and Business Banking segment posted a bottom line of $1.29 billion against $1.15 billion at the end of the linked quarter. Lower non-interest expense and lower credit costs partially offset the impact of lower revenues from the segment. Revenues from the segment were hit by the implementation of debit card intercharge fee rules.

The Consumer Real Estate Services segment reported a loss of $877 million, against a loss of $766 million at the end of the linked quarter. Higher expense led to the deterioration of the results compared to the prior period, which was partially offset by higher mortgage banking income and lower provision from credit losses.

The earnings reported by the Global Wealth and Investment Management segment remained relatively flat when compared to the linked quarter. However, it was remained 50% above when compared to the results of the same segment a year ago. When compared year over year, the results improved on lower expenses and credit costs while revenues increased as a result of higher net interest income.

The results from Global Banking declined 8% when compared sequentially, while they improved 7% YoY. The YoY improvement was a result of higher revenues helped by a decline in non-interest expense. Revenues surged due to gains on the fair value option loan book.

The Global Markets segment posted a loss of $359 million against profits of $461 million in the linked quarter. Much of the deterioration in the results from the segment was associated to DVA losses, partially offset by lower expense and higher trading revenues from Fixed Income, Currency and Commodities.

Conclusion:

The bank posted lower than expected results due to its significant litigation charges. However, the results were positively affected by an improvement in the U.S. housing markets and higher trading revenues from fixed income. JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) also benefited from the same drivers when they posted their performances for the third quarter. We reiterate our stance and recommend our investors to stay away from the stock until the bank settles its litigation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Financials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.

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